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An increase in the price of fuel increases the average cost of production of fabric produced by the Houchen Textile Company, a competitive firm
An increase in the price of fuel increases the average cost of production of fabric produced by the Houchen Textile Company, a competitive firm. As a result of the increase in the price of fuel,
a. average cost of production will increase and the profit-maximizing level of output will decline.
b. fixed costs of production will increase.
c. average cost of production will increase, as will the profit-maximizing level of output.
d. average cost of production will increase, but there will be no change in the profit-maximizing level of output.
Expert Solution
- The correct option is (a). Average cost of production will increase and the profit-maximizing level of output will decline.
Here, fuel is an input for the fabric production; henceforth, as the price of fuel rises, the production cost will rise for the Houchen Textile Company which in turn raises the average cost production cost of fabric. Furthermore, there is a decline in the profit-maximizing output level as the rise in the fuel prices makes the supply curve of fabric production to shift leftward.
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